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Of the nearly one million people with type 2 diabetes, only one-quarter are properly monitored and treated.

While 40,000 people die from heart disease each year, their conditions are not well tracked. Less than one-third of patients seeing GPs had their cholesterol properly managed and less than 30 per cent had high blood pressure controlled.

Avoidable hospital visits are costing more than $320 million, a new report says. Photo: AFR

Kidney disease was also commonly undiagnosed in people with type 2 diabetes.

Despite 2300 people committing suicide each year, "there is surprisingly little data on the outcomes of primary mental health treatment in Australia", the report says. Less than one-third of people with mental health disorders received intervention.

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While Australia's health system was designed to deal with infectious disease, wars and accidents, the biggest burden was chronic conditions afflicting three-quarters of people aged over 65.

Grattan health program fellow Hal Swerissen said each year, more than a quarter of a million people are admitted to hospital for preventable health conditions.

"Yet each year the government spends at least $1 billion on planning, coordinating and reviewing chronic disease management and encouraging good practice in primary care," Professor Swerissen said.

"Our primary care system is not working anywhere near as well as it should because the way we pay for and organise services goes against what we know works.

"The role of GPs is vital, but the focus must move away from fee-for-service payments for one-off visits."

Chronic disease has become the main cause of illness and death in Australia and costs the health system an estimated $322 million a year in avoidable hospital admissions, the Grattan Institute report says.

The report says there are no benchmarks or targets for GP care of patients with chronic illness. But there was considerable room for improvement in their health outcomes.

The report recommends that primary health care networks be given more responsibility for coordinating local services. The management of diseases also needed to be more consistent.

The report said primary care services were not working as well as they could because Medicare fee-for-service payments are made for individual visits instead of outcomes.

The fee-for-service system had inhibited innovation in the way GPs managed chronic disease, "such as making greater use of nursing and allied health staff to assess, plan, coordinate and review chronic disease prevention, in conjunction with GPs and specialists".

Funding for chronic disease needed to move away from patient-related GP payments to a broader payment for integrated care.

The report says GPs received $588 million for planning, co-ordinating and managing chronic disease in 2013-14 plus further payments for health assessments and reviewing patients. But the purpose of incentives payments had become "confused".

GPs had also found themselves "wrapped up in red tape" associated with administration costs.

"Few people with chronic disease seem to benefit from the incentive program," the report says.

In 2013-2014 only around 5 per cent of the $210 million allocated to general practices through the practice incentives program was paid for improvements in diabetes and asthma care.

"None of these payments was directly tied to improvements in patient outcomes or reductions in hospitalisation," the report says.

The Royal Australian College of General Practitioners president Dr Frank R Jones agreed there was an issue in managing chronic disease in Australia, however he said the statistics reported by the Grattan Institute were not new and used selectively.

"Of course, there is opportunity to use scarce health dollars more efficiently across the health system. But it requires investment in quality general practice, not the imposition of red-tape and suspect overseas models," he said.

"[T]he Productivity Commission Report released last month revealed that general practice continues to be the most efficient part of the health system".